Japan

Japan is experiencing a serious demographic crunch. About 27 percent of the Japanese population is over the age of 65 and there are 1.4 million fewer people today than there were in 2007, when the total population peaked at 128 million. Prospects for the future do not look good either.

When the leaders of G7 countries descend on Japan later this week, Prime Minister Shinzo Abe has taken the opportunity to invite them to visit Ise Shrine as well. Although there were many reasons for the choice of Ise-Shima as location for the summit, it is impossible to ignore the underlying sentiments of religious nationalism.

The population of Japan peaked in 2008 at 128 million. With the fertility rate — or births per woman — falling below 1.5 at the beginning of the 1990s and falling as low as 1.29 in 2004, the population is shrinking rapidly. Already Japan has one million people fewer than in 2008. The government aims to keep the population above 100 million by 2060.

Japanese Prime Minister Shinzo Abe’s Partnership for Quality Infrastructure in Asia (PQI) aims to consolidate Japan’s regional clout among the emerging Asian economies. PQI, which is often viewed as a competing formulation vis-à-vis the Chinese mega infrastructure designs, is critical to achieving the goals of Japan’s national growth strategy.

Japan aims to promote high quality infrastructure partnerships and facilitate expansion to emerging markets in Asia, and enable a revolution in productivity by investment in the future.

The following observations are drawn from the weekly report of Japan's Ministry of Finance unless noted otherwise. We use the weekly data instead of monthly to identify changes of trend earlier. We use simple convention of the week by the last rather than the first day. That means that the report for the week ending April 1 is the first week of April. To smooth out the volatility, we will often refer to a four-week average. The latest MOF report was released earlier today.

The surging yen has been the main feature in the foreign exchange market in recent days, but its advancing streak has been stopped with today's setback. The greenback traded briefly dipped below JPY107.70 in North America yesterday but has not been below JPY108 today. It is near JPY109 as NY dealers return to their posts.

Japan’s economy is stagnant and has been so for quite some time now. It looks as if Japan is now in the ‘upper income trap’. In comparison with its 10 percent real GDP growth rate between 1950 and 1960 and 4 percent growth rate between 1970 and 1980, Japan has only managed an average growth rate of 1 percent since the early 1990s. This declining trend has been driven by Japan’s considerable demographic challenges.

The Bank of Japan had a difficult start into 2016. The latest data shows that inflation in the last quarter of 2015 was lower than expected. Furthermore, doubts are increasing about the recovery of the economy. At the end of January, BOJ Gov. Haruhiko Kuroda surprised markets by announcing negative interest rates for specific commercial bank deposits at the BOJ. On March 1, Japan started to sell government bonds with a yield below zero. Market observers expect even bolder steps later this year.

The introduction of negative interest rates in Japan and the subsequent chance for yields has seen domestic investors move further out on the curve. They have also stepped up their purchases of foreign bonds.

In three weeks (through March 4) since the negative deposit rate went into effect, Japanese investors bought JPY4.4 trillion of foreign bonds. This is the second most since at least 2001 (when Bloomberg's time series began), trailing slightly behind the August 2010 flurry.